Consider the following equally likely project outcomes:

 Consider the following equally likely project outcomes:

                                                     Profit

                                                                   X             Y

Pessimistic prediction                             $      0     $500

Expected outcome                                     $  500    $500

Optimistic prediction                              $1000    $500

A) Investors will prefer project X because it potentially offers a higher profit.

B) Investors will reject both projects because the profit is too low.

C) Investors will prefer project Y because the expected return is the same as for project X but the outcome is certain.

D) Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.

 Consider the timing of the profits of the following certain investment projects:

                                         Profit

                                 L                    S

Year 1                $       0            $ 3000

Year 2                $ 3000           $       0

A) Project S is preferred to Project L.

B) Project L is preferred to Project S.

C) Projects S and L are equally desirable.

D) A goal of profit maximization would favor Project S only.

In finance, we assume that investors are generally

A) neutral to risk.

B) averse to risk.

C) fond of risk.

D) none of the above.

Consider cash flows for Projects X and Y such as:

                                 Project X        Project Y

Year 1                        $3000             $      0

Year 2                        $      0              $3000

A rational person would prefer receiving cash flows sooner because

A) the money can be reinvested.

B) the money is nice to have around.

C) the investor may be tired of a particular investment.

D) the investor is indifferent to either proposal.

Briefly discuss the incentives for financial managers to conduct their business in an ethical manner.

Briefly discuss the incentives for financial managers to conduct their business in an ethical manner.

Answer:  Extreme ethical lapses such as those evident in the Madoff Ponzi scheme may also break laws and result in fines or imprisonment.  In less extreme cases, deceptive accounting practices or sales techniques once exposed lead to a loss of trust.  Because individuals and firms are reluctant to do business with those they mistrust, a reputation for unethical behavior over the long run leads to adversarial relations with business partners, a loss of customers, and destruction of the firm's value.

 

The goal of maximize shareholder wealth inevitably conflicts with socially responsible behavior on the part of corporation.

The Sarbane-Oxley Act addresses insider trading by members of Congress.

Answer:  FALSE

 A reputation for unethical behavior can negatively affect the value of a company's stock.

Answer:  TRUE

The agency problem arises due to the separation of ownership and control in a corporation.

Answer:  TRUE

In regard to the agency problem, ________ are the principal owners of a corporation.

In regard to the agency problem, ________ are the principal owners of a corporation.

A) shareholders

B) managers

C) employees

D) suppliers

Serious ethical violations by corporations such as Enron led to the passage of

A) the Dodd-Frank Act.

B) the Insider Trading Act of 1988.

C) the Sarbanes-Oxley Act.

D) All of the above.

The goal of the firm should be the maximization of profit.

Answer:  FALSE

One of the problems associated with profit maximization is that it ignores the timing of a project's return.

Answer:  TRUE

The goal of profit maximization is equivalent to the goal of maximization of share value.

Answer:  FALSE

The goal of profit maximization ignores the timing of profit.

Answer:  TRUE

Profit maximization is not an adequate goal of the firm when making financial decisions because

 Profit maximization is not an adequate goal of the firm when making financial decisions because

A) it does not necessarily reflect shareholder wealth maximization.

B) it ignores the risk inherent in different projects that will generate the profits.

C) it ignores the timing of a project's returns.

D) all of the above are correct.

 Which of the following goals is in the best long-term interest of stockholders?

A) Profit maximization

B) Risk minimization

C) Maximizing of the market value of the existing shareholders' common stock

D) Maximizing sales revenues

If managers do not pursue the goal of maximizing shareholder wealth

A) they concentrate on more important matters like growing market share.

B) they can focus more on social responsibilities.

C) they are likely to lose their jobs.

D) they can focus more on long-term profitability.

What does the agency problem refer to?

A) The conflict that exists between the board of directors and the employees of the firm.

B) The problem associated with financial managers and Internal Revenue agents.

C) The conflict that exists between stockbrokers and investors.

D) The problem that results from potential conflicts of interest between the manager of a business and the stockholders.

Managers of corporations need to act in an ethical manner

A) because ethics violations will be punished by the law.

B) because a business must be trusted by investors, customer and the public if it is to succeed.

C) because business managers must answer to a higher authority.

D) because ethical behavior is its own justification.

Maximization of shareholder wealth as a goal is superior to accounting profit maximization because

 Maximization of shareholder wealth as a goal is superior to accounting profit maximization because

A) it considers the time value of the money.

B) following the shareholder wealth maximization goal will ensure high stock prices.

C) accounting profits are not the same as cash flows.

D) A and C.

Which of the following best describes the goal of the firm?

A) The maximization of the total market value of the firm's common stock

B) Profit maximization

C) Risk minimization

D) None of the above

Profit maximization does not adequately describe the goal of the firm because

A) profit maximization does not require the consideration of risk.

B) profit maximization ignores the timing of a project's return.

C) maximization of dividend payout ratio is a better description of the goal of the firm.

D) A and B.

Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?

A) Profit maximization

B) Risk minimization

C) Maximization of the total market value of the firm's common stock

D) None of the above

If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should

A) positively affect profits.

B) increase the market value of the firm's common stock.

C) either increase or have no effect on the value of the firm's common stock.

D) accomplish all of the above.

In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred.

In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred.

Answer:  TRUE

In a limited partnership, at least one general partner must remain in the association; the privilege of limited liability still applies to this partner.

Answer:  FALSE

In a general partnership, each partner is liable for the partnership's obligations only up to a percentage of the obligation equal to that partner's percentage of ownership of the partnership.

Answer:  FALSE 

The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.

Answer:  TRUE

General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership.

Answer:  FALSE

Ultimate control in a corporation is vested in the board of directors.

Answer:  FALSE

Owners must register and pay yearly fees to their State of residence when establishing a sole proprietorship.

Answer:  FALSE

Limited partners may actively manage the business.

Answer:  FALSE

The life of a corporation is not dependent upon the status of the investors.

Answer:  TRUE

 A sole proprietorship is the most desirable business form in all circumstances.

Answer:  FALSE

Which of the following forms of business organization is the dominant economic force in the United States?

 Which of the following forms of business organization is the dominant economic force in the United States?

A) The sole proprietorship

B) The general partnership

C) The limited partnership

D) The joint venture

E) The corporation

A limited partner is liable

A) for only his or her own share of the partnership's debts.

B) for his or her own share of the partnership's debts and contingently liable for the other partners shares.

C) only up to the amount invested by that partner.

D) for none of the partnership's debts.

 A corporation is owned by

A) shareholders and partners.

B) the shareholders who hold the company's stock.

C) the Board of Directors.

D) its Chief Executive Officer.

The major sources of financing for corporations are

A) partners contributions.

B) exchanges between shareholders.

C) interest and dividends.

D) debt and equity.

The term stockholder is equivalent to

A) general partner.

B) creditor.

C) shareholder.

D) stakeholder.

 The sole proprietorship is the same as the individual for liability purposes.

Answer:  TRUE

 In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm.

Answer:  TRUE

There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership.

Answer:  FALSE